I know what you’re thinking, “Phill, what about that book about gnomes right next to it?” Well that book is important too, but it just isn’t the most important book I’ve ever read. For real though, The Intelligent Investor by Benjamin Graham was a game changer for me, and apparently for Warren Buffett too. The Intelligent Investor is the foundation on which my understanding of investing was built. I owe much of my investing success to the lessons I learned from that book.
A lot of people don’t seem to understand how a single book can make such a large impact on a person’s life. Maybe it seems silly to assign so much significance to a single book, but the reality is that the concepts in The Intelligent Investor have changed my life.
My cousin Nic has an oft-repeated phrase that fits well here, “necessary but not adequate.” It fits this book well because the book is necessary, absolutely necessary, for one to become a good value investor, but it is not by itself adequate to insure one will become an intelligent investor. That is to say, that while the book outlines a clear and logical argument for what makes something an intelligent investment it does not imbue a person with the character traits necessary to act on the aforementioned logic. In any case, if you have any desire to learn how to invest I highly recommend this book as the best starting place to develop the proper understanding of fundamental investing (click on the picture or link above to find it on Amazon).
Perhaps the idea of being a better investor than the next person is still too abstract. After all, what is all the fuss over a few percentage points of extra return. Well, allow me to paint a picture of what the difference a few percentage points in return can mean for an investor. The following example is the difference in value after 40 years a person would have in four different scenarios that vary only by the rate of return they realize on their investments.
With an investment time horizon of 40 years, a difference in just three percentage points more than doubles your wealth. If you happen to be really good at applying the lessons in the Intelligent Investor than the ending value of your investments begin to increase exponentially with respect to your returns. If you can increase your annual returns by 10.34 percentage points your wealth will be about 18 times greater. That is no trivial matter. If you want to play with your own scenarios my Excel model can be downloaded by clicking this link.
Perhaps you are saying to yourself, “OK, so a few percentage points makes me wealthier by the time I retire. I still don’t see what the big deal is.”
According to the U.S. Census Bureau the average Bachelor’s degree holder will make approximately $2.4 Million over the course of their life. As the chart above shows, an increase of average annual returns from 7% annually to 11% annually would be equivalent to that $2.4 Million. That means that by sharpening this one skill set you could potentially see twice the amount of income you normally would over the course of your life. If you continue to improve your average annual returns, then your lifetime return grows exponentially.
Even if all my drum beating about the importance of being a better investor doesn’t resonate with you, which I’m sure for most of you it won’t, reading many of the chapters within the book will still be useful. Anyone who intends to make investments of any sort will find the chapters about defensive investing insightful (think passive investing in mutual funds). Specifically Benjamin Graham outlines the difference between an “enterprising investor” (stock picker) and a “defensive investor” (mutual funds/ETFs). Graham elaborates on how each type of investor ought to think and act. So, whether you want to pursue an active investment strategy or a passive one, this book has something for you.
Do you have a book that has changed your life? If so, let me know about it. I would love to hear your recommendations!